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In Silicon Valley, the PayPal Mafia reins supreme. So much so that it is hard to think of any successful technology startup in the last ten years—from Facebook and LinkedIn to YouTube and Yelp—that hasn’t been touched by it in some way.

Yet it is not only Thiel’s enormous success that makes him interesting, but also his contrarian views, such as his libertarian politics and his program that pays kids to drop out of college. Thiel recently published a book, Zero to One, based on the startup course he teaches at Stanford, which summarizes his business philosophy and gives four rules for creating a successful company.

Rule #1: Build Proprietary Technology That Is 10x Better

One of Thiel's core tenets is that capitalism and competition are in conflict, so an entrepreneur's key goal is create a monopoly. That’s why Thiel says “it’s always a red flag when entrepreneur’s talk about getting 1% of a $100 billion market.” In his mind, any plan that seeks out robust competition is not a very good plan.

So Thiel regards proprietary technology as essential. Not just any technology mind you, but one that provides a 10x performance improvement over the closest substitute. Even as a startup, Amazon could offer at least ten times more books than a traditional book store, just as it could be argued that PayPal made buying and selling on eBay ten times easier.

While this rule is very difficult, if not impossible, to put into strict practice (Amazon didn’t start out with technology that was particularly unique and it’s hard to define what ”ten times easier” means), it is a good way to think about how your business creates value. If you’re not shooting to produce something significantly better, then what’s the point?

Rule #2: Look For Network Effects

Everybody uses Microsoft Office because it's the most common software. PayPal is only convenient because it is popular, which makes it easy to find places that will accept payments from it. Facebook is useful because you can find your friends there. These are all examples of businesses that benefit from network effects.

What makes a network based business so perfectly suited for a startup is that they are often unattractive to large, established players. As Tim Kastelle points out in a recent post, network effects take time to develop, so at least in the beginning they are unlikely perform well by conventional metrics. But in time, they can become blockbusters.

Thiel recommends that entrepreneurs go after small markets in which network effects will take hold faster and points to his experience at PayPal as an example. When the technology was focused on the disperse market of Palm Pilot users, it never got very far. However, it was an early success on eBay, which was a far more dense community.

Thiel, like many others, is a big fan of network effects because of their ability to produce accelerating returns to scale. As the market grows, each customer becomes increasingly valuable, not just for what they buy, but for the value they add to the rest of the network. It is, after all, returns to scale that create outsize profits.

It’s easy to see how a scalable market, combined with network effects, can make for a very disruptive business model. You start with a market that is too small to attract competition and end up with a high margin business that is hard to attack. That’s why every enterprise today needs to be taking advantage of open ecosystems to create value and lower costs.